The Fatal Mistake That Doomed Samsung’s Galaxy Note

After reports of Galaxy Note 7 smartphones catching fire spread in early September, Samsung Electronics Co. executives debated how to respond. Some were skeptical the incidents amounted to much, according to people familiar with the meetings, but others thought the company needed to act decisively.

A laboratory report said scans of some faulty devices showed a protrusion in Note 7 batteries supplied by Samsung SDI Co., a company affiliate, while phones with batteries from another supplier didn’t.

It wasn’t a definitive answer, and there was no explanation for the bulges. But with consumers complaining and telecom operators demanding answers, newly appointed mobile chief D.J. Koh felt the company knew enough to recall 2.5 million phones. His suggestion was backed by Samsung’s third-generation heir apparent, Lee Jae-yong, who has advocated for more openness at one of the world’s most opaque conglomerates.

That decision in early September—to push a sweeping recall based on what turned out to be incomplete evidence—is now coming back to haunt the company.

Two weeks after Samsung began handing out millions of new phones, with batteries from the other supplier, the company was forced to all but acknowledge that its initial diagnosis was incorrect, following a spate of new incidents, some involving supposedly safe replacement devices. With regulators raising fresh questions, Messrs. Lee and Koh decided to take the drastic step of killing the phone outright.

Instead, as a result of the flammable phones and the botched recall Samsung’s leaders are now struggling to salvage the company’s credibility. At risk is the expected February launch of its next flagship smartphone, likely to be called the Galaxy S8.

The U.S. Consumer Product Safety Commission, which oversees product recalls in Samsung’s biggest smartphone market, is expected to investigate whether Samsung notified the agency soon enough of dangers posed by the device. Samsung’s decision to launch its own recall, bypassing the CPSC’s formal process for a time, may have prevented regulators from figuring out more about the root cause, some U.S. lawmakers suspect.

Outside experts have pointed to a range of possible culprits, from the software that manages how the battery interacts with other smartphone components to the design of the entire circuit.

Engineers are also looking into the possibility that the battery case may have been too small to house a battery of that capacity, according to one Samsung mobile executive.

Big product recalls are never easy. Consumers, however, are often willing to forgive mistakes if they believe the company is looking out for them and moving swiftly to address problems.

The bigger-screen phone was in tune with consumer tastes. When iPhones were shrinking in size, the Galaxy Note anticipated the shift to bigger handsets, which earned it the nickname “phablet,” a mashup of phone and tablet.

Samsung’s engineers packed new features, including an iris scanner, water resistance, an improved stylus and about 16% more battery life than its previous Note device. Presales for the Note 7 started strong after Mr. Koh introduced the device at a lavish event at a theater in Midtown Manhattan on Aug. 2. Analysts boosted their projections for Samsung’s earnings, while investors pushed the stock to record highs.

As user reports of overheating began to trickle in days later, company executives were at first unruffled. Some suspected that many of the alleged incidents had been faked, and argued that even a small number of genuine cases shouldn’t overshadow the fact that millions of smartphones were working fine, according to people familiar with their thinking.

Gathering at Mr. Koh’s office at R5, the 27-story office tower overlooking Samsung’s sprawling Digital City campus south of Seoul, he and other mobile executives, including his predecessor, J.K. Shin, and longtime Samsung top lieutenant G.S. Choi, examined the X-ray and CT scan reports of the phone, which appeared to show heat damage to the internal structure of the battery, according to people familiar with the discussions.

In China, where the company used only Amperex-supplied batteries in its Note 7s, the company dismissed reported smartphone fires as fabrications, arguing it was impossible for those batteries to have caused problems.

On Oct. 11, Mr. Lee called Mr. Koh and ordered him to discontinue the smartphone. Later that day, Mr. Koh wrote a letter to the company’s mobile division, a copy of which was reviewed by The Wall Street Journal, calling the crisis “one of the toughest challenges we have ever faced.”

“There are few things in life I’m reasonably confident of predicting; one of those is….we’re going to have yet another issue of lithium ion batteries catching fire,” from a range of devices said CPSC commissioner Robert Adler. “This is just a massive problem.”